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CFA Conference: C. Thomas Howard

Behavioral Portfolio Management: A New Paradigm for Managing Investment Portfolios

Moderated by Craig D. Senyk, CFA, Mawer Investment Management

C. Thomas Howard is CEO, director of research, chief investment officer, and co-founder at AthenaInvest, a US SEC–registered investment adviser. He led the research project that resulted in strategy-based investing, the methodology that underlies AthenaInvest’s investment approach. Dr. Howard oversees Athena’s ongoing research, which has led to a number of industry publications and conference presentations. He is also professor emeritus at the Reiman School of Finance at the Daniels College of Business at the University of Denver. Previously, Dr. Howard lectured at SDA Bocconi School of Management, Handelshøjskole Syd, and École de Management de Lyon. He has also served as a consultant for a number of firms, including First Data Corp and Janus Capital Group, and served on the board of directors at AMG National Trust Bank. Dr. Howard holds a BS in mechanical engineering from the University of Idaho, an MS in management science from Oregon State University, and a PhD in finance from the University of Washington.

Issues include the following.

Measurable and persistent behavioral factors are emerging as a new source of information with the potential to transform how we think about portfolio management and to dramatically improve portfolio performance

Behavioral portfolio management (BPM) is the next step in a developing paradigm shift away from modern portfolio theory and toward behavioral finance

Emotional crowds dominate pricing and vol (prices rarely reflect underlying fundamentals); emotions drives investing; we should be in stocks, but the average 401k portfolio is 50% cash, 30% cash and 20% stocks; at 66, Howard has a 50-year investment horizon (a few people live that long) – he’s 100% stocks: emotions trump arbitrage

Behavioral data investors can earn superior returns (don’t follow the crowd but the behavioral challenges are enormous); seek objectivity about behavioral realities: building superior portfolios is straightforward but emotionally difficult

Redefining risk as the chance of underperformance (vol isn’t risk, it’s an emotion)